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Hong Kong Exchanges and Clearing (HKEX) said Wednesday it had made a proposal to the LSE to combine the two companies in a cash and share deal worth £29.6 billion, or £31.6 billion ($39 billion) including debt.

If it happens, the takeover would create the world's third biggest stock exchange group behind the New York Stock Exchange and Nasdaq in terms of the value of companies listed on those markets, according to the operators' data.

It would also be the biggest foreign takeover of a UK-listed company since Japanese pharmaceuticals maker Takeda bought Shire in 2018, according to Dealogic data.

The deal would "redefine global capital markets for decades to come," HKEX CEO Charles Li told reporters on a conference call. It would reinforce Hong Kong's position as the key connection between mainland China, Asia and the rest of the world.

But it faces a series of hurdles. Hong Kong's offer comes at a sensitive time, politically. Brexit uncertainty is casting a shadow over London's role as a global financial center. At the same time, Hong Kong — Asia's premier financial hub — has been rocked by months of pro-democracy protests sparked by concerns that Beijing is tightening its grip on the city.

The Hong Kong government appoints seven of the exchange's 13 directors, including the CEO, according to its website. Furthermore, the chairman's appointment is subject to the approval of Hong Kong's beleagured chief executive Carrie Lam.

Political opposition?

The transaction would give Hong Kong control of equity markets in the United Kingdom and Italy, as well as key infrastructure for European debt markets, and would therefore face "elevated political risks," analysts at Berenberg noted.

"Historically, it is political objections that have derailed cross-border [mergers] in the exchange space," they said.

"The London Stock Exchange is a critically important part of the UK financial system, so as you would expect, the government and the regulators will be looking at the details closely," a UK government spokesperson said.

The offer is also conditional on the LSE terminating its proposed acquisition of financial data provider, Refinitiv, announced only last month. That £22 billion ($27 billion) deal is aimed at transforming the LSE into a global markets and information juggernaut to rival Michael Bloomberg's financial data empire.

In a statement, the LSE described Hong Kong's offer as "unsolicited, preliminary and highly conditional." It said it would consider the proposal but restated its commitment to the Refinitiv transaction. Refinitiv declined to comment.

Shares in the LSE spiked as much as 11% on the news of Hong Kong's offer, before trimming those gains slightly.

Li insisted the LSE offer was not "hostile."

"We are openly expressing our admiration for the city of London and LSE so that we give all the stakeholders the opportunity to openly evaluate our transaction and conclude it is a compelling transaction," he said on a call with reporters.

The deal was about "connecting the plumbing" between the two markets, giving investors and issuers access to a larger pool of capital, said James Fok, HKEX's head of strategy.

Li said HKEX had to overcome political objections to its acquisition of the London Metal Exchange in 2012. Since then, it had "invested heavily in the UK, created a lot of jobs and paid a lot of taxes," and the LME remained a "quintessential British institution," he added.

HKEX said it would seek a secondary listing of its shares on the LSE after the transaction was completed to reflect its commitment to the United Kingdom.

Correction: An earlier version of this story gave an incorrect name for the head of strategy at HKEX.